Commercial Real Estate ETFs: Long or Short?

Includes: DRV, RWR, SRS
by: Tom Lydon

Commercial real estate and the sector’s related ETFs are in a potentially perilous position. That leaves just one question: is it a buying opportunity, or is it time to go short?

Some investors have such a doom-and-gloom feeling about what lies ahead for commercial real estate that they’re considering whether shorting the sector is worth it. After all, storefronts lie vacant, vacancies are up in many major cities and office space sits empty.

Matt Krantz for USA Today explains that the commercial real estate sector is easy to short with an ETF. But here’s a word of caution for you: REITs pay out a vast majority of their earnings as periodic dividends. If a REIT ETF is paying out 9%, and many are right now, you will be required to cough up those 9% dividends to the party from whom you borrowed the shares while you are shorting the ETF. Ouch! Keep in mind, this is only when shorting a regular ETF.

There are also short ETFs available for this market, as well. If you still want in, bear in mind that leveraged and inverse ETFs need to be monitored closely, and shorting is not for everyone.

  • ProShares UltraShort Real Estate (NYSEARCA:SRS): down 73.7% year-to-date

  • Direxion Daily Real Estate Bear 3x (NYSEARCA:DRV): launched July 16

Larry Light for The Wall Street Journal reports that while the housing market is showing sings of bottoming, the commercial real estate market has a longer drop before a turnaround.

Among the issues facing the sector right now include:

  • REITs face at least two years of crushing debt maturities
  • Downward-sliding property values
  • Low occupancy rates that continue to fall and earnings that are only weakening

Some, however, are bullish on REITs. There are analysts out there who feel that the sector has seen the worst, and 2010 will mark a period of improvement. Some pension funds are also jumping in. Cadillac Fairview Corp. acquired a 49% stake in a Queens mall last week. It’s a sign to some that more pension funds could be coming forward with money, says Anton Troianovski for The Wall Street Journal.

  • SPDR Dow Jones REIT (NYSEARCA:RWR): up 6.9% year-to-date

  • iShares FTSE NAREIT Industrial/Office Complex (NYSE:FIO): up 4.4% year-to-date